Wind­fall for states as ru­pee de­pre­ci­ates

While rais­ing ex­cise duty on petrol & diesel, the Cen­tre said it would use the funds to tackle hike in rates, but has now washed its hands from any duty cut and wants states to take the lead

Financial Chronicle - - PLAN, POLICY -

In the last six months states have made wind­fall gains from the cur­rent spurt in fuel prices even though it is burn­ing a big­ger hole in con­sumers’ pock­ets. They are be­ing forced to pay all-time high prices for petrol and diesel.

Ac­cord­ing to a State Bank of In­dia re­port, the in­crease in petrol and diesel prices is likely to swell states’ ex­che­quers by Rs 22,700 crore over and above the bud­get es­ti­mates for the cur­rent fi­nan­cial year.

The in­crease trans­lates into rev­enue gain of Rs 1,513 crore for ev­ery $1 in­crease in in­ter­na­tional crude oil prices to all the ma­jor 19 states of the coun­try.

Since March, petrol and diesel prices have in­creased by Rs 5.60 per litre and Rs 6.31 per litre, re­spec­tively, in Delhi. Pump price of petrol in Delhi on Tues­day stood at Rs 80.87 per litre and diesel at Rs 72.97 a litre, an all-time high fuel price.

In fact, petrol price is closer to breach­ing the Rs 90 a litre mark in Ma­ha­rash­tra where it has climbed to over Rs 89 a litre.

“The vari­a­tion in prices in var­i­ous states is pri­mar­ily due to dif­fer­ent rates of the value-added tax (VAT). For ex­am­ple, at 39.12 per cent per litre, Ma­ha­rash­tra has the high­est rate of VAT on petrol and at 16.66 per cent per litre, Goa has the low­est VAT. This wind­fall gain will have pos­i­tive im­pact on state fi­nances, which might push down the states fis­cal deficit by 15-20bps, other things re­main­ing un­changed,” said the SBI re­port au­thored by its group chief eco­nomic ad­vi­sor Soumya Kanti Ghosh.

The SBI re­port points to the na­ture of tax­a­tion on auto fu­els where the Cen­tre levies ex­cise duty as a fixed charge while state levies VAT as a per­cent­age (ad val­orem ba­sis) of the value of the prod­uct.

In the ad val­orem sys­tem, wind­fall gain is in built in the event price of prod­uct rises. This is how gains for the states have been higher than the Cen­tre.

But, if one looks at over­all gain from the pe­tro­leum sec­tor, the Cen­tre’s col­lec­tion is still much higher than all states put to­gether, thanks to the in­crease in ex­cise duty on petrol and diesel on nine oc­ca­sions be­tween Novem­ber 2014 and Jan­uary 2016.

As per oil min­istry’s Pe­tro­leum Plan­ning and Anal­y­sis Cell, while the Cen­tre col­lected Rs 2,29,019 crore as ex­cise rev­enue from the pe­tro­leum sec­tor in FY18, states VAT col­lec­tion has just reached Rs 1,84,091 crore even though VAT rates is over 30 per cent in sev­eral states. Also, due to fre­quent ex­cise duty in­creases, while the Cen­tre has more than dou­bled its col­lec­tions from Rs 99,184 crore in FY 15, the col­lec­tions for states has pro­gres­sively in­creased over last few years.

While rais­ing ex­cise duty on petrol and diesel when crude oil prices were low, the gov­ern­ment said it intended to use the fund when prices rise. But the Cen­tre has now washed it hands from any ex­cise duty cut and wants states to take the lead.

The SBI re­port has also taken the view held by the Cen­tre sug­gest­ing duty re­duc­tion by states. “We also es­ti­mate that since states are hav­ing an incremental rev­enue over the bud­geted one, they could cut on an av­er­age petrol prices by Rs 3.20 a litre and diesel by Rs 2.30 a litre, with­out af­fect­ing their rev­enue arith­metic.

“States like Ma­ha­rash­tra, Mad­hya Pradesh, Pun­jab, Tamil Nadu, Andhra Pradesh, Ra­jasthan and Kar­nataka have the priv­i­lege to cut petrol prices by at least Rs 3 from their ex­ist­ing rates and Rs 2.5 on diesel,” it said.

A sug­ges­tion has also been made that if the states im­pose VAT on base price (crude oil + trans­porta­tion cost + com­mis­sion), then diesel prices could drop by Rs 3.75 and petrol by Rs 5.75. How­ever, this will re­sult in a rev­enue loss of states of around Rs 12,000 crore (net of Rs 34,627 crore loss and Rs 22,700 crore gain from oil bo­nanza).

Al­ready states like Ra­jasthan, Andhra Pradesh and West Ben­gal have pared rates that will bring down fuel prices by Rs 1-2 per litre. But an­a­lysts sug­gest a com­bined ac­tion is re­quired to re­duce the pain of the com­mon man. Tax should be re­duced both by Cen­tre and states and a por­tion of the bur­den should be taken by the state-owned en­ti­ties. Also, inclusion of fuel in GST should be ad­vanced, they added.

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